Updated Mar 7, 2023 - Economy

Judges question SEC rejection of Grayscale's spot bitcoin ETF

Illustration of the SEC logo eagle dropping a green cube.

Illustration: Lindsey Bailey/Axios

The debate around spot-bitcoin exchange-traded funds, or ETFs, has hit U.S. courts.

Driving the news: The Securities and Exchange Commission (SEC) was in the hot seat Tuesday, fielding questions from U.S. judges sussing out its reasoning for rejecting Grayscale Investments' application to convert its bitcoin trust into an ETF.

Catch up fast: The SEC has always said the same thing in explaining the spot-bitcoin ETF rejections: There's not enough proof that bitcoin's underlying spot markets couldn't be manipulated.

  • Grayscale is suing the SEC, arguing that its decision to deny its application was "arbitrary," given the regulator's prior approval of futures-based bitcoin ETFs.

Be smart: Spot markets are where assets are traded for immediate delivery. Bitcoin futures, by contrast, trade on the CME.

Details: Judges Sri Srinivasan, Neomi Rao and Harry Edwards of the District of Columbia Circuit Court of Appeals in Washington, D.C., asked about the relationship between bitcoin futures prices and spot bitcoin.

  • "It seems to me that the Commission really needs to explain how it understands the relationship between bitcoin futures and the spot price of bitcoin," Judge Rao said.

What they're saying: SEC Senior Counsel Emily Parise argued that the stated 99% correlation rate between futures and spot prices "doesn't necessarily mean causation," and referred to intraday volatility in spot markets.

  • "That’s what the surveillance framework is looking for," she said.

Of note: This goes back to the SEC's ask that exchanges submit to surveillance.

  • Yes, but: The rule requires that exchanges be "designed to prevent fraud," not detect it.

Quick take: General consensus would appear that U.S. judges understood the issues at play and were showing some skepticism around the rejection.

  • Shares in the Grayscale Bitcoin Trust, or GBTC, climbed in the hours following the end of the hearing.
  • The SEC declined to comment to an emailed query from Axios.

The big picture: Conversion of the $14 billion trust into an ETF would, in theory, close the gap between price and the underlying bitcoin for hundreds of thousands of U.S. investors.

The bottom line: The burden of proof is not on the SEC.

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